28 September 2012 13:25 [Source: ICIS news]
By Jo Pitches
LONDON (ICIS)--The outlook for the European naphtha market remains gloomy, with demand expected to stay lacklustre and oversupply persisting unless crucial factors change, sources said this week.
“The market remains long, it’s not clearing,” a buyer said on Friday. “The outlook for October is not good.”
On Thursday, a trader said: “The naphtha market is still very long, with more supply than demand.”
As has been the case during recent weeks, the consensus remains that the naphtha price backwardation and relatively robust crack spread do not reflect the weak physical state of the market.
“Yes I think that’s a pretty fair statement, especially concerning the backwardation,” a second trader said on Friday. "The backwardation seems disconnected from the current real physical market.The crack is a different animal, it’s more linked to gasoline strength. If the gasoline crack [spread] stays strong, then nap crack stays strong."
Backwardation is when current prices are higher than those for future months.
On Friday morning, the October naphtha crack spread stood at minus $4.80/bbl, compared with minus $6.20/bbl a week earlier.
While participants agree that the naphtha crack spread is being supported by robust gasoline values, this appears to be based on hopes of increased demand from the gasoline sector rather than any physical activity.
The second trader continued: “Gasoline is tight. The gasoline crack and backwardation has sky-rocketed."
On Friday morning, gasoline refining margins stood at $18/bbl, while the backwardation between prompt and front month prices was at $67/tonne.
"It’s [the gasoline crack spread and backwardation] pulling nap cracks and spreads up, " the second trader added. "The question is, is the phys tightness in gasoline fully priced or does it have further upside. And that’s difficult to assess from this point.”
Participants agree that the key to relieving Europe’s oversupply would be the opening of an arbitrage to Asia.
During recent weeks, a number of cargoes have been booked for the east despite unfavourable economics
On Friday morning, the October east-west price spread stood at $4.75/tonne, rendering the arbitrage firmly shut. While dependent on factors such as freight rates, a spread of $15-20/tonne is usually cited as necessary for an arbitrage to open east.
It is hoped that the east-west spread will widen soon.
However, while ICIS reported on Friday that Asian naphtha prices are set to climb higher, the aforementioned buyer believes that an arbitrage to Asia is unlikely to open. With poor petrochemical margins in Asia, and with crude oil prices hikes the main driver behind naphtha prices in both regions, Asian and European prices are likely to move up in tandem.
“Margins in the Far East need to be better if an arb is to open,” the buyer continued.
When asked whether an arbitrage might open to Asia, the second trader replied: “Good question, the situation is not obvious with gasoline tightness at the moment. But it seems we would need to have an open arb at one stage. The east-west spread needs to widen further. We need to see arbs moving out during the first half of October to balance the market.”
Crude-driven naphtha price hikes remains continue to raise concerns for already-weak demand.
“[European] naphtha needs to get cheaper to help demand. It’s just too expensive for petchems,” the buyer said.
The second trader said: “Regarding the CP settlements, I think petchems will continue running max because margins are good, and they will buy nap, propane being now out of the cracking pool. But they seem covered for the first half of October, so more into the second half.”
The October ethylene contract price settled down by €10/tonne from September, at €1,290/tonne. An initial European propylene contract price for October has been agreed at €1,140/tonne, down by €20/tonne from September.
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